Defense modernization and operating funds offer the most options for the Pentagon’s strategy-based plan to achieve more than $450 billion in spending cuts over the next 10 years, but force size, military pay and benefits also must be addressed, Panetta told the audience at the Woodrow Wilson International Center for Scholars' Lee H. Hamilton lecture.

The effort that then-Defense Secretary Robert M. Gates launched last year to eliminate overhead infrastructure, waste and duplication has resulted in $150 billion in savings and may yield up to an additional $60 billion, but looming budget reductions require much more, Panetta said.

“Every program, every contract, every facility will be scrutinized for savings that won’t reduce readiness or our ability to perform essential missions,” he said.

DOD must preserve essential military capabilities, the secretary said, and maintain a robust defense industrial base – the businesses that manufacture or maintain U.S. military weapons, equipment, munitions, hardware and software. However, budget constraints likely will mean reduced modernization in some areas, along with procurement reform to control cost, improve delivery times and increase competition, he added.

Also, personnel costs are “a major driver of budget growth and … are on an unsustainable course,” Panetta acknowledged. Military end strength has increased by 5 percent since 2001, but pay and health care costs are up about 80 percent over that time, he noted.

“This will be an area of extreme challenge, because my highest priority is obviously to maintain the vitality of our all-volunteer force, and keep faith with the men and women who have put their lives on the line to defend the country,” he said.

In a tight budget, the cost of pay and benefits to a degree represents a trade-off against funds for necessary training and equipment, the secretary said. Still, he vowed that any changes to compensation will be “grandfathered” where possible so as not to affect people currently serving.

Ground forces will be smaller after U.S. forces leave Iraq and Afghanistan, Panetta said, but the nation still faces a wide array of threats, “from terrorism to nuclear proliferation; from rogue states to cyber attacks; from revolutions in the Middle East to economic crisis in Europe to the rise of new powers like China and India.”

All of those elements represent security -- geopolitical, economic and demographic shifts that make the world “more unpredictable, more volatile and, yes, more dangerous,” the secretary said.

“I must be able to maintain a sufficient force to … fight in more than one area,” he told the audience.

National Guard and Reserve forces have proven themselves in the past decade’s combat theaters, and can respond when future crises occur, the secretary said. But the nation must have a military trained and equipped to respond to an uncertain and surprising security environment.

“Looking at all these areas, the potential exists, if we make the right strategy-based decisions, to build a modern force that sustains our leadership in the world, and underwrites our security and prosperity,” he said. “But to accomplish this will require that we navigate through some very perilous political waters – there are serious dangers ahead and very little margin for error.”

Panetta said the sequester mechanism built into the Budget Control Act of 2011 could trigger “disastrous” cuts -- not only for DOD, but also for the State Department, the U.S. Agency for International Development and other agencies critical to the nation’s security interests.

National security depends on defense, diplomacy and the ability to help other countries while investing in domestic quality-of-life issues such as education and employment, the secretary said.

“We must remember that the American people and our partners across the globe are safer, more stable, and more prosperous because of our global leadership, and the strength of our military,” he added.